Stocktake: Cathie Wood misses point on passive investing

Some high-profile names put the boot into index funds last week, with Tesla’s Elon Musk, venture capitalist Marc Andreessen and Ark Invest fund manager Cathie Wood reflecting on the apparent downsides of passive investing.

Andreessen and Musk reckon passive funds have grown too powerful. Many disagree, but sceptics are entitled to make their case.

However, there is an obvious irony in Cathie Wood’s argument that the huge shift towards passive funds over the last 20 years has resulted in a “massive misallocation of capital”.

Wood made her name by investing in speculative technology stocks, initially earning huge returns that resulted in investors piling into her overvalued funds. Her Ark Innovation ETF has fallen over 70 per cent since peaking last year – “maybe the biggest, fastest destruction of shareholder capital in fund history”, as Morningstar’s Jeffrey Ptak tweeted recently.

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‘Misallocation of capital’

A “misallocation of capital?” Just maybe.

That aside, Wood complains passive funds "prevented many investors from enjoying a 400-fold appreciation" in Tesla between its 2010 market flotation and December 2020, when it entered the S&P 500.

This is such a silly argument. Passive investing is based on John Bogle’s idea that there’s no point looking for the needle in the haystack; just buy the haystack. Bogle has been proven right, with the vast majority of stock-picking funds underperforming indices.

Saying you could have made a bundle by investing in Tesla in 2010 is true, but it completely misses the point.